Is this the beginning of Japan's recovery--or just a brief pause on the downward path to a full-fledged depression? After watching the Japanese yen fall as low as 146 to the dollar, its lowest level since 1990, the U.S. and Japan joined forces on June 17 to break the currency's headlong plunge. The joint intervention helped push the yen back up to 137 to the dollar by day's end while punishing currency speculators.
Meanwhile, the show of support for the yen served the additional purpose of lessening the immediate need for China to devalue its currency in order to stay competitive with Japan. Such a move would have started another disastrous round of "beggar-thy-neighbor" devaluations in Asia. That alone made the intervention worthwhile, especially given President Clinton's upcoming trip to China.
But propping up the yen is a stopgap measure that does nothing to solve Japan's deep-seated problems. With the Japanese economy slipping ever deeper into recession, and the banking system weighed down by hundreds of billions of dollars in bad loans, immediate structural reforms are essential. The most pressing need is for Japan to undertake a major bailout of its banks, as the U.S. did to solve the savings and loan crisis of the 1980s. Without such aggressive action to resuscitate the faltering financial system, the Japanese economy cannot escape its current slide.
Unfortunately, a U.S.-style bailout will require painful measures, such as closing insolvent banks and taking bad loans onto the government's books. In the aftermath of the intervention, Prime Minister Ryutaro Hashimoto repeated earlier promises to reform Japan's economy. Yet such promises have been made before, with little effect.
If Japan's government fails to act, there are two big dangers. First, Japan is flirting with real economic disaster. The assumption among policymakers in Japan is that exports alone will pull the country out of recession, as they have in the past. But with the rest of Asia in a deep downturn as well, exports may not be enough. Second, if Japan continues to struggle, its problems could very well spread to the rest of the global economy. The most likely scenario: The yen resumes its fall, forcing matching devaluations all across Asia and a steep drop in stock markets all around the world.
So far, the crisis has been delayed because growth in Europe and the U.S. has been strong enough to withstand the storm from Asia. The U.S. economy, in particular, has demonstrated amazing resiliency in the face of an expanding trade deficit, which has subtracted $115 billion, in 1992 dollars, from gross domestic product over the past two years. And that vitality continues: Business investment in equipment soared to 8% of GDP in the first quarter, nearing its postwar high. Americans are showing their faith in the future with their wallets, as consumer spending in the second quarter is estimated to rise at a 4.5% clip, on top of a 6.1% first quarter.
Yet if Japan collapses, even a vibrant U.S. economy will suffer, along with the rest of the world economy. It's time for Japan's leaders to step forward.